Macrina, A;
Mahomed, O;
(2024)
Systemic Perspective of Term Risk in Bank Funding Markets.
International Journal of Theoretical and Applied Finance
10.1142/S0219024924500018.
(In press).
Preview |
Text
macrina-mahomed-2024-systemic-perspective-of-term-risk-in-bank-funding-markets.pdf - Published Version Download (995kB) | Preview |
Abstract
The transition from term-based reference rates to overnight reference rates has created a dislocation in the market-making processes between the interbank and non-interbank funding, and their respective derivatives markets. This dislocation can be attributed to differences in funding and corresponding interest rate swap transactions, a thesis we explain and characterize in detail. It is then shown how this dislocation may be resolved. Based on a systemic perspective of a stylized financial system, an aggregated banking system is constructed that is void of idiosyncratic credit risks but still vulnerable to liquidity risks. Within this setup, a mathematical modeling framework for term-cognizant interest rate systems is derived that enables the pricing and valuation of bank term funding and associated derivatives transactions with varying liquidity characteristics. Other outcomes include: (i) a detailed analysis of the incomplete market paradigm that encapsulates bank term funding rates and the risk management processes involved therein; and (ii) a recovery of consistency in the pricing and valuation between funding and related interest rate swap transactions, along with a mechanism to exchange term risk.
| Type: | Article |
|---|---|
| Title: | Systemic Perspective of Term Risk in Bank Funding Markets |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1142/S0219024924500018 |
| Publisher version: | https://doi.org/10.1142/S0219024924500018 |
| Language: | English |
| Additional information: | © The Author(s) This is an Open Access article published by World Scientific Publishing Company. It is distributed under the terms of the Creative Commons Attribution 4.0 (CC BY) License which permits use, distribution and reproduction in any medium, provided the original work is properly cited. |
| Keywords: | Term rates; interbank market; money market; interest rate derivatives; pricing kernels; liquidity risk; SONIA and SOFR; LIBOR transition; benchmark reform |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10188199 |
Archive Staff Only
 |
View Item |
